What Should the Biden Administration Do With REPO?

After two years of debate in Congress and the broader world over forfeiting the frozen assets of the Russian Central Bank for the benefit of Ukraine, President Biden on April 24 signed into law the REPO Act, which bestows this authority on him. As Ingrid Brunk has written, the administration now has the option to take the money frozen in the United States and give it to Ukraine to pay for its recovery from Russia’s manifestly illegal war. 

But a number of legal and policy questions remain. There is a relatively small amount directly at stake—less than 2 percent of the total amount frozen by our allies. How the United States acts, however, will influence those allies, set legal precedents, and shape future U.S. policy choices. The administration could structure the transaction in a way that comfortably fits within U.S. law, puts little or no pressure on the international legal regime, protects the role of the dollar as an international currency, and makes ending this terrible war more likely. Alternatively, it could structure the transaction in a way that gives rise to substantial Russian claims for compensation; stretches, if not undermines, the international legal order; harms the dollar; and makes peace harder to reach. We offer here a road map that would maximize the chance of the former outcome and minimize the risks of the latter.

Waiting for an International Mechanism

Section 105 of the REPO Act directs the president to take such actions as he deems appropriate to work with our allies to dispose of the frozen Russian funds, which may include setting up an “international mechanism” (the statute’s phrase) to determine Ukraine’s right to compensation from Russia and to satisfy those rights with funds drawn from the assets frozen by the United States and its allies. The statute does not compel the president to rely on this mechanism, the use of which necessarily would delay the delivery of money to Ukraine. Nevertheless, waiting for states to establish an international mechanism and for it to hand down its awards remains the best choice. 

First, the delay need not be crippling. The stakeholders—here the governments of the Group of Seven (G7, including the U.S. government), the EU, and Ukraine—can move swiftly when needed. We do not think the administration would need to submit the agreement to another round of congressional approval. Nor need the mechanism take much time to establish what Russia owes. The Council of Europe already has begun registering claims. Moreover, the loan mechanism we describe below could make disbursements in advance of any claim determinations. This would put funds in Ukraine’s hands quickly, although subject to restrictions to ensure the money is spent wisely and consistent with the purpose of reconstruction.

Second, if the international mechanism uses procedures of the sort typically found in international claims tribunals, working through an international mechanism puts to rest whatever due process or takings claims Russia otherwise might make. Section 104(k) of the REPO Act preserves Russia’s right to seek compensation for any constitutional injury suffered from forfeiture of its money. A properly constituted international mechanism, however, would satisfy whatever procedural rights the Due Process Clause bestows on Russia and provide lawful grounds for refusing compensation for the confiscation of the property consistent with the Takings Clause.

Third, U.S. cooperation with a mechanism would blunt most international legal claims that Russia might have against the United States. To be sure, it is inconceivable that Russia will consent in advance to the use of this mechanism. Russia might argue that transfer of the assets to a mechanism that it does not accept violates whatever protection international law bestows on Russia and its assets. But from the perspective of the Biden administration considering how to exercise its new authorities, putting property under the control of an internationally legitimate mechanism, even one that lacks mandatory power over Russia, satisfies rule-of-law principles better than confiscating the money to advance U.S. interests—even if those interests include helping Ukraine rebuild from the war that Russia brought on.

It also is true that even a legally solid strategy still might not satisfy Germany or Japan, whose support will be important for the mechanism’s success. Their behavior in the first half of the 20th century has left them with lingering reparations issues that make them nervous about creating new precedents. Yet, given their strong commitment to showing the world how completely they remade themselves in the second half of the 20th century, we doubt that this obstacle is insurmountable.

Fourth, working with an international mechanism is fundamental to make a “set off” structure work. We turn to set off as a more legally secure means to tie the forfeited funds to Ukraine’s legal claims below. 

Tying Ukraine’s Money to International Claims

This March, Hugo Dixon, Lee Buchheit, and Daleep Singh (DBS) produced a blueprint for using the hoary financial principle of set off to connect the frozen Russian assets to Ukraine’s international reparation claims. The concept rapidly garnered interest among G7 policymakers. Buchheit’s status as the authority on sovereign debt practice and the fact that Singh then was in the process of rejoining the National Security Council as deputy national security adviser for international economics gave extra credence to the idea.

At its heart, set off is a simple financial step. A debtor reduces or cancels its debt by offsetting an amount owed to it by that debt’s creditor. Trillions of dollars of banking transactions clear daily through set off. Institutions such as the Federal Reserve and Belgium’s Euroclear facility net out the day’s interbank transactions to determine who owes whom what. There is nothing sinister or extraordinary about the procedure.

As DBS see it, the United States and its allies can establish a syndicated loan facility for Ukraine, with Ukraine’s claims against Russia serving as collateral. They can make the loan nonrecourse, which means the lenders can recover only against the collateral in the event of nonpayment. This feature would limit Ukraine’s obligation, in the event it does not repay the loan (as it surely will not), to turning over the collateral. The creditors, all states that currently hold frozen Russian state assets, at that point can set off the rights obtained from Ukraine against the legal duty to return the Russian assets they hold when the circumstances justifying the freeze end. Assume, for example, that the United States both held a claim for $4 billion against Russia as a result of obtaining its share of the loan collateral and held $4 billion of Russian assets through its freeze. As a result of set off, the U.S. claim would be satisfied while Russia would have lost all its retained rights in the assets. All this takes place through an accounting notation, with no judicial involvement needed. The lenders in turn would use the money freed up by the set off to satisfy the awards to Ukraine made by the international mechanism, net any disbursements from the facility already paid to Ukraine. Russia’s interests in the frozen assets disappear.

This mechanism works, however, only if the rights used to set off the debt (here, the duty ultimately to return frozen funds) reflect rule-of-law principles. A single state’s guess as to the amount Russia might owe in reparations for violating international law is problematic, while the judgment of a properly constituted international mechanism such as a claims tribunal is less so. Hence the creation of and reliance on the international mechanism envisioned in the REPO Act is critical.

As we argued before REPO’s enactment, some residual legal problems remain. Now that the statute has arrived, it’s worth discussing them in greater detail. The headline is that the set-off approach is not legally bulletproof, but it seems to be the best option available given geopolitical exigencies.

Would the loan be legal under U.S. law?

The Biden administration cannot lend money at will but instead must rely on authority bestowed by Congress. Here the REPO Act is helpful, at least with regard to the (relatively small) sums under its control. Its Section 104(b)(1) expressly enables the president to “transfer” or “vest” the frozen assets to a Ukrainian Support Fund. That fund, under Section 104(f), may in turn make contributions to the contemplated international mechanism to provide Ukraine with reparations. A loan transfers possession of the funds, and termination of the loan with retention of the collateral then vests their ownership in the former debtor. A fair reading of this language authorizes a loan up to the amount of the frozen assets. 

Must the Treasury deliver the funds set off to the federal budget? 

Until adoption of the REPO Act, an old but important law presented an additional obstacle to transferring additional funds to Ukraine. The Miscellaneous Receipts Act, a pre-Civil War law now embedded in Title 31 of the U.S. Code, forbids federal agencies from eating what they kill. Absent express statutory authorization, an agency must turn over any “money” it receives “from any source” to the general resources of the Treasury. An outright forfeiture of frozen assets would have counted as a receipt of cash, triggering the duty to return the funds to the budget. On its face, this requirement applies only to a monetary receipt, and with a set off no money changes hands. Further, we have found no indication from the Office of Management and Budget, the responsible agency within the government, indicating that it would apply this statute to a set-off transaction. Now the issue has faded into the background, as the REPO Act specifically provides for an alternative disposition of the assets that would vest in the United States, creating an express exception to the Miscellaneous Receipts Act’s default rule. 

What about sovereign immunity?

Sovereign immunity comes in two flavors, domestic and international. The United States, like most states that invite deposits from foreign central banks in their own banks, provides strong protection for those deposits under U.S. law. It bars enforcement of most judicial orders on behalf of creditors, including the beneficiaries of court judgments and arbitral awards, seeking satisfaction from these deposits. But most regard this law as addressing only acts by courts. It has nothing to say about government acts that do not require judicial assistance to execute. Several U.S. courts have indicated that set off does not trigger the protections provided by domestic sovereign immunity law for a foreign central bank’s account.

International law is different. The United States belongs to no treaty on point, so any obligations in this area flow from customary international law. A customary rule exists if it reflects both general state practice and a widely held belief that compliance with the rule derives from a sense of legal obligation (opinio juris), rather than from convenience or self-interest.

Brunk’s scholarship argues that the customary international law of sovereign immunity protects the deposits of central banks made in another country’s banking system to a greater extent than the rule protecting the property of any other state-owned enterprise. She agrees that international law’s immunity doctrine does not clearly go beyond shielding central banks from judicial actions. She worries, though, about drawing a line between executive and judicial acts that change ownership, as well as the possibility that a set off might violate some other international legal principle protecting alien property. Freezing the deposits, which interferes with the right to dispose of them but leaves ownership untouched, may pass muster. But, Brunk argues, customary international law probably bars the outright expropriation of these assets.

Brunk observes that even if confiscating central bank deposits under the REPO Act were seen as inconsistent with certain principles of international law, another part of international law, the doctrine of countermeasures, might allow it. This international law principle recognizes a state’s right to respond to some international law violations with acts that otherwise might be illegal. Countermeasure principles would permit the United States to violate Russia’s rights under international law, including those protecting the central bank deposits, to the extent the violation had the purpose of inducing Russia to stop breaching a legal duty owed to the United States. But, she argues, it is not obvious that the United States, rather than Ukraine, has the right to invoke this doctrine. The argument that any state can claim to have suffered a wrong with respect to a breach of the prohibition of aggressive war proves too much. Further, because the doctrine stipulates that states should undertake only countermeasures that are reversible, if possible, a permanent deprivation of Russia’s ownership of the funds seems problematic. Brunk worries that defending forfeitures as a countermeasure would either exceed the limits of permitted countermeasures or convert the doctrine into an “open-ended self-help device” to the detriment of international law.

We share Brunk’s concerns about the impact of a forfeiture on countermeasures doctrine. But we depart at the premise of her argument. We think the evidence supporting a customary international law rule protecting central bank deposits in foreign banks from set off is an inadequate foundation for potential Russian claims. In normal times, the rules governing interbank transactions, including those where central banks are parties, cause significant adjustments of the amounts in these accounts on a daily basis. This is how SWIFT and Euroclear manage interbank transactions, including those involving foreign central banks.

It is true that most states whose international banks compete for these deposits have adopted domestic laws providing enhanced legal security for central bank accounts. We are not aware, however, of instances where those laws go further than limiting the judicial function of attachment and execution. Moreover, even this additional protection does not apply to set off.

It is plausible that states adopt these laws to support their banking industries, not to add another brick to the temple of the international legal order. Instead of a general sense of legal obligation, we see a behavioral regularity based on state self-interest. We see no indication that any of the states providing greater security for foreign central bank deposits seek to create a supplementary doctrine of international law, rather than just help their own banks. Nor do we see how a widely used accounting principle raises any line-drawing issues. To the contrary, courts consistently refuse to interfere with the set-off transactions involving foreign central banks. Finally, application of a general rule of private law, pervasive in the banking industry, to an account held by a foreign central bank could hardly amount to impermissible discrimination against alien-held property.

On balance, then, the application of a normal accounting mechanism to reduce the amount of funds in a foreign central bank’s accounts, done without any exercise of a state’s judicial power, does not transgress customary international law. Without a violation, there is no need to strain countermeasures doctrine to privilege the state’s act. 

Piercing the Russian central bank’s corporate veil?

A key feature of the limited liability corporate form, found in most legal systems in the world, is separation of the legal duties of a company and its owners. Normally a company cannot be held liable for the legal misdeeds of its owner, any more than the owner bears independent responsibility for the acts or omissions of the firm. Only in exceptional circumstances may a legal system pierce the corporate veil to assign joint liability to the company and its owner. This general legal principle is sufficiently pervasive to be regarded as relevant to international legal disputes.

In Certain Iranian Assets, the International Court of Justice (ICJ) held that the United States breached its international obligations to Iran when it used the funds of Bank Markazi, Iran’s central bank, to satisfy a domestic court default judgment against Iran for sponsoring acts of terrorism. The court relied on the principle of limited liability, along with the absence of evidence of the bank’s involvement in Iran’s bad behavior, to reach this result. Applying this reasoning to the Russian central bank, it would seem to be also improper to hold the Russian bank, a separate legal entity from the state as a matter of Russian law, liable for the state’s legal obligations to Ukraine.

The ICJ decision, however, rested on the Treaty of Amity between Iran and the United States (since terminated by the United States), not on an independent rule of customary international law. No such treaty exists between Russia and the United States. Nor can one fairly argue that the court’s decision gives birth to a customary rule, as it applied a particular treaty. Other factors might further distinguish the Iran and Russia cases. The U.S. judgment enforced against Bank Markazi’s deposits came out of a domestic court proceeding in which Iran did not take part, and to which arguably Iran had a right under international law not to be subject. Any judgment realized against Russia’s central bank deposits would be issued by an internationally recognized mechanism, a body arguably more impartial than any single domestic judicial body.

We are not sure that these distinctions would persuade the ICJ, which has a history of respecting the form of limited liability to a greater extent than do U.S. courts. But, as far as we know, Russia has no treaties with the putative lenders like the one that Iran had with the United States. Thus it has no pathway for bringing this question before that court. Further, the views of the ICJ on customary international law are authoritative but not conclusive, and the lenders remain free to disagree with that body on this particular legal point in a matter over which the ICJ has no jurisdiction.

Congress’s decision, implemented through the REPO Act, to allow the use of central bank assets to right Russia’s wrongs, like Congress’s earlier decision to make the Bank Markazi assets available to a specially designated class of Iran’s judgment creditors, may depart from the general rule of separation of legal duties of a company and its owners. However, given the close ties between these state institutions and the ruling regime as well as the lack of the rule of law in those countries that might protect central bank independence domestically, the departure seems more pragmatic than outrageous. The U.S. Supreme Court reached a similar result regarding Cuba’s central bank 40 years ago. We do not think Congress should make a habit of doing this and hope it does not become a precedent. But neither does the veil-piercing it has authorized present a clear violation of international law.

Safeguarding the Dollar and the Prospects for Peace

Finally, we consider two policy questions that implementation of the REPO Act implicates. The United States derives value from the dollar’s seigniorage—that is, what users are willing to pay for the currency. Part of the demand that sustains this value depends on the international acceptance of the dollar as the unit of account for transnational transactions. Anything that discourages demand by making holding dollars less secure threatens that value.

Second, we must contemplate the possibility that the war in Ukraine may end not with Russia’s unconditional surrender. Rather, the parties could see their way to some kind of negotiated settlement. In any such negotiation, Russia’s rights in the frozen assets will be on the table. If Ukraine and Russia otherwise saw peace or an armistice within reach, it would be tragic to have this property dispute stand in the way.

The mechanism-and-set-off path does a better job of mitigating these concerns than would outright confiscation. Consider seigniorage first.

Any measure that puts central bank deposits under a cloud creates some risk for the dollar, if only because later lawmakers may invoke the precedent to adopt more sweeping measures. But as precedents go, a step that draws on an international legal process and an accepted financial practice in the face of a patent act of aggression looks more limited and legitimate than a naked expropriation. Keeping the genie of lost bank security in the bottle may be hard, but relying on the judgments of an international mechanism provides a better stopper than treating any central bank deposit as presumptively liable to seizure. 

As for peace, either pathway, set off or unilateral confiscation, nullifies Russia’s rights and invites a demand for restoration. Following the approach proposed by DBS, which we defend here, however, adds another layer of legitimacy to the nullification and spreads accountability for it. Deference to an international mechanism that limits Ukraine’s rights to reparations is easier to justify than a self-judging determination. Assigning responsibility for the nullification to an international mechanism formed by many states makes it harder to isolate any single state as bearing a duty to compensate Russia. Russia won’t readily swallow the loss of billions of dollars of assets. But greater legitimacy in the process of nullifying Russia’s rights will subdue the intensity of its demand and reduce the likelihood that it will hold a peace deal hostage to restoration of the frozen funds.

The Way Forward

Now that the REPO Act is law, the table is set for implementing the DBS plan. As shown, the legal risks, including potential effects on international law, are tolerable. What if, instead, an impatient president used this authority simply to confiscate all the money in the Russian bank accounts right now and send the money to Ukraine?

The REPO Act permits this outcome, but it would be a blunder to proceed this way. First, it is critical to achieve collaboration among the states that have sanctioned Russia, in particular the members of the EU. They have most of the money; by comparison, the U.S. contribution would be a pittance. And those states will have to satisfy both the EU courts and their own sense of what international law requires. There are indications that the major players in the EU might accept the legality of the set-off structure. The same countries, however, might find a straightforward confiscation objectionable.

With an international mechanism, even one that Russia has not accepted, the United States and its allies can argue that their actions are based on normal legal process. Without such a mechanism, taking the money looks like a naked expropriation, with Ukraine’s inchoate if substantial reparation claims seeming more a pretext than a sound legal basis. Respect for international legality serves to hold the EU together, much more so than the United States. A straight forfeiture, then, would not only raise the legal risk to the United States but also likely make it harder to put together a coalition that can deliver real assistance to Ukraine through the provision of frozen assets. 

Editor's note: An earlier version of this article misstated the name of the Miscellaneous Receipts Act.